Kurt R. Brekke (Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration), Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington),
Odd Rune Straume (Universidade do Minho - NIPE) address Price and quality in spatial competition.

ABSTRACT: We study the relationship between competition and quality within a
spatial competition framework where firms compete in prices and
quality. We generalise existing literature on spatial price-quality
competition along several dimensions, including utility functions that
are non-linear in income and cost functions that are non-separable in
output and quality. Our main message is that the scope for a positive
relationship between competition and quality is underestimated in the
existing literature. If we allow for income effects by assuming that
utility is strictly concave in income, we find that lower
transportation costs always lead to higher quality. The presence of
income effects might also reverse a previously reported negative
relationship between the number of firms and equilibrium quality. This
reversal result is further strenghtened if there are cost
substitutabilities between output and quality. Equilibrium quality
provision is always less than socially optimal in the presence of
income effects.